Internal control and corporate innovation: evidence from China*

This study investigates whether and how internal control quality affects firms' innovation decisions on exploratory innovation and routine innovation using a sample of Chinese listed firms. Our empirical evidence shows that firms with high-quality internal controls are associated with less innovation activities with regard to exploratory innovation, routine innovation, and total innovation. We further find that the role of internal controls in innovation strategies is more pronounced for high-tech firms. Specifically, we show that firms with high-quality internal controls shift innovation investment from exploratory innovation to routine innovation. Our findings provide evidence that internal control quality can have side-effects on a firm's innovation activities in emerging markets.